South African Revenue Service (SARS) Annual Report 2006/07

FINANCE PORTFOLIO COMMITTEE
10 October 2007
SOUTH AFRICAN REVENUE SERVICE (SARS) ANNUAL REPORT 2006/07

Chairperson: Mr N Nene (ANC)

Document handed out
South African Revenue Service Annual Report 2006/07 presentation

Audio recording of meeting

SUMMARY
The focus of the meeting was on the performance of South African Revenue Services in the previous financial year, the fulfilment of their institutional mandate, the creation of a tax compliant culture in South African society, extension of the tax base in South Africa, constraints in executing their mandate and regional integration and partnerships. The Committee was exceptionally pleased with the deliverables of SARS, their performance, accounting culture, except minor details that related to asset seizures and legal processes in relation to seizures.

MINUTES
The Chairperson welcomed everybody and noted an apology from the Minister of Finance, Mr Trevor Manuel, who was unable to attend due to a Cabinet meeting in Pretoria. He indicated that he is however willing to arrange a separate discussion with Committee on issues related to SARS if the Committee had specific concerns.

In his opening remarks, Commissioner Gordhan said that SARS was celebrating its tenth year anniversary of the SARS Act in October 2007 which gave it its administrative autonomy. Their focus was to create a stable institution with improved service to South Africans, the implementation of a system that would result in a profound change of attitude by South Africans, encouraging the usage of e-platforms to collect tax and reduce the volume of paper work which was proving to be possible because 20% of payments by citizens were done through SARS e-payment system.

The report covered the context in which SARS conducts its daily business: the economy had grown by 4.8%, the key drivers of growth were the finance, mining, manufacturing, wholesale and retail trade sectors. Imports had grown by 18.4% compared to 10.7% in 2005, which created a concern for the country’s balance of payments or budget deficit. Consumption had increased to 7.3% compared to 6.6% in 2005.

The compliance culture had generally improved and the tax base was broadening even though there were still loopholes in the system. In the past year the institution had experienced significant trade and tax policy changes which impacted directly on the mandate of SARS. Some of these were the ratification of the Southern African Customs Union agreement, the implementation of the memorandum of understanding (MOU) on the restriction of clothing and textile goods imported from China, the development of rules for industrial development zones, the extension of the Southern African Development Community (SADC) clothing quotas for Malawi, Mozambique, Tanzania and Zambia and the establishment of textile and clothing industry development programmes.

Regarding tax policy changes, SARS had embarked on a tax amnesty for small businesses, and the tax reduction on retirement funds introduced by the Minister of Finance in the 2007 budget speech. It was working on preparations for a review of corporate tax, preparatory work for the proposed diamond export levy to promote local beneficiation, the legislation to give effect to the guarantees given by the South African government for hosting the 2010 FIFA World Cup and the withholding tax for non-resident entertainers and sportspersons which had come into effect.

SARS had fully embraced the importance of regional integration with other SADC countries through its work and support of the SA foreign policy objective of strengthening Africa’s institutions. It undertakes diagnostics and targeted interventions. So far SARS had entered into a MOU with various SADC countries either on capacity-building, border control mechanisms, a SADC single administration regime and approval of the establishment of dedicated SARS capacity-building offices to support other regional countries.

The operational highlights for SARS had been the revenue target collection which amounted to R495,5 billion at a cost of 1,04 cents per rand. There had been tremendous improvements in compliance, this could be assessed through the growth of the register by 8%, small business amnesty and education and outreach programme. Improved service and assessment processes allowed for processing of 96% of income tax and PAYE within five working days. SARS had incurred costs in ensuring tax compliance amongst South Africans by providing three call centres which had proven to be effective, e-filing and SARS practitioners. Lastly the back office efficiency had significantly improved, with an improved turnaround time for income tax returns increased by 10%.

SARS had undertaken a fundamental review of its strategy ensuring the development of a modernisation agenda. This would be achieved through, converting call centres into becoming centres of contact and first call resolution. To develop risk engines to enable smarter profiling of risk areas. This modernisation strategy would require substantial financial resource investment so that SARS was effective in its pursuit.

Discussion

Mr B Mnguni (ANC) commented that he could not find any flaws in the Annual Report. He asked for detail on the strategy to improve tax collection in 2007 and the nature and cost of court battles that involved SARS. He noted that Cabinet had decided that SARS would be a lead agency in border control and asked what was the international norm.

Commissioner Gordhan replied that through their tax relations manager officer, SARS engaged directly with Chief Executive Officers and Chief Operational Officers of companies. Their financial performance reports were monitored through newspapers and annual reports. In addition SARS observed whether the issue of tax was discussed at board level to gauge the importance attached to tax compliance. Third party mechanisms were always useful to gather more information about transgressors. SARS has spent at least R60 million in legal cases. It was an international trend that custom administration plays a critical role in border control. There were various models that were applied by countries to suit their border control needs. In the South African context, SARS needed an advanced technological system to perform its duty effectively because of the different factors in border control such as people management, goods and security. For example, the United States was considering proposing a 100% scanning container system by an exporting country to the United States, that would require beefing up of the South African security system from the revenue service perspective.

Mr S Marais (DA) thanked the Commissioner and his team for their work. He sought more information on the contributing factors for the increased tax collection of 2006/7, linked with tax relief that the Minister had granted through the budget speech. He asked about the composition of the disability group that was employed by SARS. He said that the international benchmark on debt revenue was 3% to 7% and currently SARS’s debt revenue was 12%. He asked if SARS would meet the international standard. Lastly he asked about the specific trend of seizure of vehicles, the procedure for seizures and whether officials abused their position of power and overstepped their mandate.

The Commissioner replied that the increase in tax collection had been driven by economic factors - one of the key aspects that boosted the tax revenue had been expenditure in the consumption sector (high VAT collection). If companies spent their capital income in investment, more corporate tax was charged. Tax relief was a fiscal policy issue within the competency of National Treasury. SARS applied the progressive tax principles in tax payment (earn more, pay more) and in overall there had been less tax burden for the low income earners. There was an application of equity in the South African tax system even though there were still structural constraints in relation to its small narrow base.

The Commissioner said that the policy guidelines provided for by Department of Labour would always guide SARS’s employment labour practices with regard to the composition of employees with disabilities.

In terms of debt revenue, he conceded that the percentage was slightly higher but the real problem was the classification of debt. There was a consideration to reclassify the debt of R16bn, once the former was completed in three years, there would be a significant reduction of between 9% to 8% of the current debt.

He said that as a matter of principle no seizures took place outside the parameters of the law. The officials who undertake seizures would never compromise the institutional integrity of SARS. They were expected to be impartial and if any of them were found to be overstepping the mandates of SARS, punitive measures would be taken against them. The procedure in terms of vehicle seizure in particular, was that vehicles would be impounded for 42 days allowing the importer to provide necessary documentary proof of the import and often, it was the clearing agency and the importer that did not follow proper procedures. In addition there were two critical agencies that play a role in the importation of goods to South Africa. One was the South African Bureau of Standards, responsible for providing clearance in terms of standard compliance of all goods and their impact on the South African economy. The second was the Department of Trade and Industry, dealing with the trade policy regime. SARS’s actions were tied to the instructions of the two agencies when it came to imported goods.

Mr K Moloto (ANC) asked about the risk and challenges with which SARS was confronted. He also asked if SARS was engaging with other stakeholders to access information on property sales such as the Deeds Office.

The Commissioner replied that enforcement was one of the key challenges for SARS. There was still more than R1billion that need to be collected from the sales of property and the business intelligence centre of SARS was closing the net on those buyers who have not entirely declared their assets. SARS worked very closely with the Deeds Office in its pursuit to gather intelligence and the institution was beefing up this area of work with dedicated resources and in 2008 there might be positive outcomes. To this effect SARS had established a council with various stakeholders with an objective to improve policing, enforcement and much progress has been made in this regard. SARS was also considering proposing a special legislation in the property sector in relation to surplus income and investment.

Mr M Mbili (ANC) asked if SARS had any mechanism to reduce the workload. He sought the views of SARS management on the preception that they seemed to be attaching more importance to big businesses with less emphasis or support for small business with the intention of improving their tax behaviour and compliance.

The Commissioner replied that SARS had received 15 million tax returns and of those, 6% still need to be revised due to SARS administrative errors in the capturing process. As an immediate intervention to reduce the workload, SARS had reduced the complexity of the form (e-filing), with a two stage assessment which would introduce a production line similar to Toyota (linear production line). Apparently Toyota was the only car manufacturing company that had a linear production line and they were the leading innovators in that area. Regarding the amnesty approach for Small Medium Micro Enterprises (SMME) and their interaction with SARS, it was a soft approach because SARS wanted to build a better relationship with the sector. There was a dedicated general manager responsible for SMMEs specifically because it was a complex and large sector and SARS was still studying the requirements of the sector. SARS had established a separate tax regime for SMMEs. For example, any business that made an annual turnover of under R43 000 was exempt from being taxed, R43 000 to 150 000, they were expected to pay 10%. Above R150 000, it was the normal tax application. The National Treasury and SARS were working on a new tax product for SMMEs and recently a special desk for SMMEs had been created to provide service to them. The difference between big corporate businesses and SMMEs was that the tax base of the latter was very small and they were large in number. In comparison, big corporate companies had a large tax base and they were few in number so it was easy to engage with them plus they were more organised. Finally, the tax mix had changed the huge dependency on individual tax payers to carry the burden but moved to indirect taxes.

The Chairperson sought information on SADC regional relations to improve border control.

The Commissioner replied that there was a SADC transit system that was launched in March 2007, which was based on a single administrative documentary system. This system allowsed smoother transfers of goods because most of the goods came through Durban and were transferred to other SADC countries. The transit system was born out of the work of the Ministers of Trade and Industry in the region.

Dr G Woods (NACEDO) commended the Commissioner and his team. They were the only government institution with tangible deliverables so it was easy to measure their performance in numerical terms. Thus it was not complex to exercise oversight over the institution. There was a strong correlation between institutional strategy and targets which was comforting to the Committee and the opposition. He asked for clarity on whether the revenue gains were contributed by compliance, not economic performance. He did wonder if the bullishness of SARS approach in their tax collection had an impact on lay people who might not have the resources to open a legal case against SARS.

The Commissioner noted the trajectory of state institutions in the 15 years of the country’s democracy where institutions like SARS were expected to serve the whole nation and overcome their historical legacy. The economic aspect had been central in driving compliance and education and outreach which had been systematic in its application. The challenge was to ensure that SARS interventions were not ad hoc. There was a stronger institutional presence across provinces and greater frequency of interactions amongst the business sector in particular. SARS had a responsibility to better identify risk using the current data at their disposal and also using third party instruments. There were no real estimates for now but every society had a tax gap and SARS had a handle on it. South African taxpayers had the right to challenge SARS decisions on tax in a court of law, even though it might be exorbitant for them. There were various mechanisms in place to avoid court litigation. There was a tax board which handled tax appeals, tax courts which handled cases below R300 000 which was the non-litigation route to avoid the adversarial way of resolving a tax dispute in court.

Ms N Mokoto (ANC) asked about the tightness of the IT security management system since SARS handled citizens’ confidential information. She sought more information on the nature of litigation and the circumstances that lead to litigation. She asked for clarity on the difference between high risk and low risk. Whether there were any convictions of SMMEs? The compliance model of SARS promoted voluntary compliance, what were the teething problems of the model?

Mr Mnguni asked if there was any progress with regard to tax collection in the taxi industry and had SARS broadened their base in that industry?

The Commissioner replied that SARS was fully aware that it had sensitive information, therefore on a continual basis the system was upgraded and staff members were well aware of the procedures. So far SARS had managed to prevent penetration and had had no major glitches. Regarding litigation, there were various mechanism in place to avoid court litigation. SARS took cases to court to allow the court to interpret the law and SARS used court as a last resort. For the 2006/7 financial year, SARS had spent R60 million in litigation cases. Any citizen that earned a salary with no additional income generated from businesses was classified as low risk and any citizen with additional income was a high risk. SARS used the credit worthiness of system that was used by the financial institutions to determine the low and high. There were also high risk industries and SARS was paying a special attention to understand their business models. Those SMMEs that were affected by enforcement actions through convictions were those that did not submit any application for amnesty. The number of applications for amnesty were 24 000 received. 22% were new registrants in the tax industry and the lowest sector that applied were the accounting and legal sector. The majority were from retail, wholesale and the taxi industry. In overall, the tax base was broadened even though it was not sufficient due to the low response.

Regarding voluntary compliance, SARS’s ultimate objective was that citizens would comply without this being enforced. This was linked to a social dimension which related to the credibility of the institution, public confidence in democratic institutions and the state. The other one relates to the psychographic which was about respect for the rule of law, respect for tax administration and understanding of its role in government fulfilling its developmental agenda. It’s the societal value system and positive attitude. The critical question was whether SARS was able to sustain the current momentum and public confidence.

Mr Moloto asked about practical measures that SARS used to update their data.

The Commissioner replied that SARS used third party information very effectively in its updating of data, particularly credit bureaus. For an example in 2007, SARS posted 3.9 million tax returns, only 29 000 were returned as undelivered which demonstrated a significant improvement in the quality of the available data. SARS also uses sms to drive the address campaign.

In his closing remarks the Commissioner expressed his gratitude to the Committee for their continued support and guidance.

The meeting adjourned.